Kneale: Why Stop Pay Cap at Executives?

The bonus bashers are having a great time chastising Wall Street, exploiting public outrage over half a trillion dollars in losses and a 40 percent decline in our retirement accounts to smack all those fatcat bankers who earn more than we do.

The latest: President Obama aims to tether the next tranch of Tarp to a $500,000 salary cap for senior executives at any bank that takes bailout money. Parachutes are banned, and restricted stock awards won't kick in 'til taxpayers are repaid in full. Meaning, like, never.

That could smite hundreds of people at J.P. Morgan Chase , Citigroup , Bank of America , Goldman Sachs, Morgan Stanley and the rest.

But guess what? Soon this same mob could come after your pay, too, arguing you make too much money and that something must be done about it. In the meantime, these PR populists risk thwarting the recovery they hope to help.

This bonus backlash started out as a justifiable assault on a few chief executives at wobbly Wall Street giants; they got the boot and left with tens of millions of dollars. Now the enemies of wealth creation seem bent on punishing everyone in finance.

“These people are idiots,” U.S. Sen. Claire McCaskill declared on the Senate floor on Friday. She proposes outlawing total compensation of more than $400,000 a year for anyone at any company receiving TARP bailout booty.

The Democratic demogogue thus seeks to punish even people who did their jobs well and had no part in the losses spawned by their colleagues in mortgage-backed securitization and other derivatives. People in investment banking, client services, wealth management, stock analysis—even the techies who run the trading networks.

As the father of a young woman on Wall Street writes in a letter published yesterday in The New York Times: “She has nothing to do with subprime mortgages or other ‘toxic’ assets. ... There is nothing ‘shameful’ about my daughter’s bonus. She earned it.”

But why stop there, Sen. McCaskill? Let’s slap the pay cap on any business that does work for the government, and firms that want a piece of the stimulus package, and university labs that get federal grants. No doubt the compensation critics would love to take a whack at the yawning gap between salaries in the C-suite and the factory floor.

The bonus bashers are led, alas, by President Obama. He branded it “irresponsible” and “shameful” that Wall Street paid out $18 billion in bonuses last year, while racking up far more in losses.

That unfair swipe ignores key facts in this class war. The $18 billion sum was down 40 percent from a year ago, and it was paid to 160,000 people. Most of them earned less than the average of $112,500 apiece.

Bonuses on Wall Street aren’t an “extra” doled out in great times, on top of full pay. They comprise the variable portion of base compensation costs, typically 50 percent or so over all; this lets a firm pay out more in flush years and cut back in lean ones.

A waiter works on tiny base pay and hopes to reap the bulk of his compensation on good tips. On Wall Street, many people work all year long on only 30 percent of salary, or 50 percent, or as little as 10 percent for the biggest stars. They collect the rest in a one-shot windfall after year-end. So now their pay is down by 40 percent or more, and their company stock is down 50 percent or more. That isn’t punishment enough?

Usually spats over excessive compensation shouldn’t, in my view, be the purview of complainers in Congress, at the AFL-CIO and at shareholder-rights groups: They have no dog in this fight. Shareholders and boards do.

That changes once taxpayer money gets pumped into errant banks. (Albeit, the feds initiated this exchange, forced money on some big names that didn’t want it, and exacted stern terms for preferred shares. It wasn’t a giveaway.)

Now all comers feel they legitimate cause to kvetch. The challenge becomes how much to second-guess and meddle. Good stewardship requires restraint, not to mention respect, lest you damage the business you just invested in.

We have endured the Internet bubble that burst in 2000, the housing bubble that blew up in late 2007, and the commodities bubble that popped last year. Now looming over us is a new bubble—in what one dictionary defines as feigned piety or righteousness; hypocritical devoutness or high-mindedness. The new bubble is in sanctimony.